Numbers don't tell whole story at Wendy's

Wendy's Co. lost more money in the third quarter than it did a year ago, but the Dublin-based fast-food company said it also earned a larger share of a highly competitive market.

Mary Vanac, The Columbus Dispatch

Wendy's Co. lost more money in the third quarter than it did a year ago, but the Dublin-based fast-food company said it also earned a larger share of a highly competitive market.

Wendy's lost $26.2 million in the third quarter compared with a loss of $4 million in the same quarter a year ago, but it attributed the recent quarter's loss to a $49.9 million one-time charge to retire debt early.

Eliminating one-time items, earnings from continuing operations were down 2.9 percent from the previous year's third quarter, but income fell because the company's restaurant redesign efforts meant some were closed for remodeling.

Restaurant profit margins improved slightly to 13.9 percent because of menu price increases and more sales of higher-priced items, Christopher O'Cull, a securities analyst for Keybanc Capital Markets, reported to clients in a research report.

Revenue rose 4.1 percent.

Wendy's has been replacing restaurants, building menus, increasing marketing and advertising efforts, and boosting employee training and customer service in a multiyear push to improve its brand and reputation for premium hamburgers, chicken sandwiches and salads.

The company's restaurant rebuilding project alone, which includes razing and rebuilding some restaurants and extensively remodeling others, is expected to cost $500 million. But Wendy's is seeing sales rise at least 25 percent at rebuilt restaurants.

The company is using this sales increase to persuade franchisees to make the highest of three investments - $750,000 - to rebuild their restaurants. The mid-level investment is $550,000 and the low-level $375,000, which would be used to renovate existing stores. Returns from the two lower investments would be commensurately lower, President and CEO Emil Brolick told analysts during a conference call yesterday.

Even more telling than revenue growth is sales growth at restaurants open at least a year: up 2.7 percent in the third quarter from the same period last year. Same-store sales in the fast-food industry have been flat, so this increase means Wendy's market share is growing.

"Our top-line momentum continues as we generated our sixth consecutive quarter of same-store sales growth," Brolick said in a written statement. Combined with growth in last year's third quarter, Wendy's has seen same-store sales increase 4.5 percent in the past two years, he said.

Wendy's is using cash flow, not debt, to pay for its brand-building efforts, Brolick said. The company plans to return excess cash to shareholders in the form of dividends and stock buybacks.

The company said yesterday it would boost its quarterly dividend to 4 cents a share from 2 cents. It also said it may spend up to $100 million to buy back its shares through December 2013.

Stephen Hare, Wendy's chief financial officer, told analysts there was no better use for his company's excess cash than to give it to shareholders. "We have $450 million in cash on the balance sheet," Hare said. "That asset earns little for us."

During the conference call, analysts questioned the wisdom of passing along cash to shareholders rather than keeping it to fuel the company's growth.

"If they want to take cash off their balance sheet to do this, they have every right to do that," said Howard Penney, managing director of Hedgeye Risk Management, an investment research firm in New Haven, Conn.

"But they're not being honest with themselves if they think they're generating free cash flow," said Penney, whose calculations show Wendy's has used $15 million in cash so far this year, and probably $20 million by the end of the year.

In addition to restaurant rebuilding, Wendy's announced last month a rebranding effort that would change its logo and the look of its signs, as well as marketing and advertising materials, by early next year.

"Our focus on operational levers such as menu innovation and improved marketing are reinvigorating the brand," Brolick said.

Wendy's shares rose 3.5 percent to close at $4.39 yesterday on the Nasdaq stock market.